A blog about Politics, Economics, and assorted random things I find interesting

10/13/2016

I've seen lots of blog postings and articles about how to win the BSG. I will share with you a solid strategy along with other ideas to consider that apply to other strategies as well.

What drives sales

I did a response surface analysis to find out what are the levers that actually drive sales. In order of importance, they are: Price, Quality (SQ), Rebate. Nothing, repeat, nothing else appreciably moves the needle. Not 300 more points of celebrity endorsement. Not all the "green energy" or "diversity" stuff. NOTHING but these three things truly matter to sales. So on the revenue side, we want to focus on P, Q, and R.

What drives costs

Costs have several factors: material, labor, plant setup, training, financing, etc. You will find that cost management is the most important lever of success. The winner will be that team or person that find the lowest cost way to make shoes that sell competitively.

A Winning Strategy

There are several ways to win the game, but I believe the plan I will share with you is the best. The approach I recommend is striving to be the low-cost producer at very high volume. As competitors fade away, you can swallow their market share. Note, there is risk to this strategy, because if another team is employing the same approach, it will be cutthroat. You will either win huge or lose huge, because if you don't employ this strategy effectively, you will not be able to recover.

Here's what you are striving towards: you want to build a massive wholesale distribution machine all over the planet. You want to sell as many shoes as possible at the lowest price that still makes money without stocking out. Don't worry about having killer margins and massive profits at first. The important thing is building the "machine." The outsized profits and market share you will earn later will allow you to more than make up for mediocre performance in the first 2 or 3 rounds.

THE MACHINE

The machine is oriented around making shoes of acceptable quality at the lowest possible delivered cost. This is done primarily by optimizing the manufacturing and distribution base.

You want Latin America plant as your main plant to supply all markets but AP. You want massive production capability with trained, excellent, but cheap labor. There is no other means of lowering costs that is more effective than having a very large Latin America plant of huge capacity.

All the shoes made in NA and shipped to LA have a tariff. But shoes made in LA and shipped to NA pay no tariff. And the LA plant will cost MUCH LESS to operate, so it's a win/win. $4 per shoe times millions of pair is massive cost avoidance.

When the game starts, you have a fairly large AP plant, and a NA plant half the size. You will quickly see how expensive that NA plant is. Move capacity away from it as soon as you can. The means breaking ground on your LA plant right away, and adding as much capacity as you can. Borrow money to do so.

Ideally, you want to operate each plant at 120% of capacity with full overtime. This will slash your product costs. As you add capacity in LA, you will eventually shut down the NA plant. DO NOT SELL OFF THE NA PLANT if you can avoid doing so. The overall fixed cost of having an idle plant is surprisingly low. If you sell off that plant, you will present a major competitive advantage to your rivals as they can buy your capacity at a discount, bring it online instantly, and slash their production costs.

Only once some other competitors have sold NA capacity does it make sense for you to consider selling any of yours. It's likely that your best bet is to wait several rounds before selling the NA capacity-- just let the plant sit idle instead of selling it off.

Round by Round-- plant allocation

Round 1: Upgrade your AP plant with the 1 SQ rating improvement. Do not upgrade the NA plant (we're migrating away from it). Add 50% capacity to your AP plant. You will need this capacity to support global sales while your LA plant is being constructed. Speaking of-- add as much LA capacity as you can. Run your AP plant at 120% of capacity. NA plant at 100%.

Round 2: Again add as much LA capacity as you are allowed to. Upgrade the LA plant with 1SQ quality improvement. Add another 50% to your AP plant and upgrade the worker productivity. After this, you should have an AP plant that is huge and has two upgrades. Idle the NA plant and operate both LA and AP at 120%.

Round 3: Add as much LA capacity as you can. Do the second upgrade to worker productivity. Do not add AP capacity at this time. Do not sell NA yet, idle it again.

Round 4: Add as much LA capacity as you can. By now you will have a massive plant that is fully upgraded. It is likely you will not need as much AP capacity. Run the LA plant at 120%. AP at whatever reduced capacity need to support sales. NA is idled.

Round 5: By now, other teams will have sold off some capacity in NA. If you wish to sell yours, it's safe to do so this late in the game. You can begin selling off some AP capacity that you is not necessary because of your massive LA plant-- don't stop adding to LA until it is a 12M pair plant. This is your primary source of product for the 3/4 markets, with AP plant supplying only AP market (due to massive tariff). You should be selling most of your AP production into AP, with the goal of LA supplying the rest of the globe.

MARKETING

DO NOT PARTICIPATE IN PRIVATE LABEL OR INTERNET SALES, at least not at first. This runs counter to what all of the "experts" opining about BSG will tell you. You must always remember that you are selling mostly to distributors. They don't like having you compete with them. The best measure of your overall strategy is the number of dealers you have signed up to carry your shoes. If you are doing well, you will have more distributors than all your rivals. Be sure to support them (at least $500 in support, no worse than 3wk delivery).

Why avoid private label (P/L)? It is simply too risky. Either you must price yourself such that you have no margin in private label, or you must run the huge risk of making shoes that didn't sell because you were undercut by someone else who priced themselves for no margin. Private label is a race to the bottom. There is always going to be a round or two where some team makes a killing in P/L with fat margins. That lures in other people who end up dying in P/L. Only the first profit makes it-- all those who come later will be stuck on a suicide mission trying to scratch out a few pennies of margin in P/L. Do not fall into the trap. FOCUS ON WHOLESALE.

What about online sales? Online sales seem appealing, but when you look at the considerable extra setup costs, and the need to offer more models (compared to wholesale), the pressure on margins can be substantial. It also tends to undermine your wholesale distribution network. Don't get sucked into online sales, it's too small of a market to worry about at first. Later, if you have a massive capacity manufacturing base, you have the margin cushion that you can undercut your competitors and move effectively into online sales.

No amount of advertising or celebrity endorsement will help you as much as having a quality shoe at a low price. NOTHING else matters as much. So instead of spending $2 per pair on endorsements, cut the price by $2 if you wish. The effect on margins is the same, but you will sell more. And you need the volume.

When you start to win big in wholesale, your rivals will be lured into Private Label and Online sales. This will be the end of them. They will end up with mountains of unsold shoes. Then they will have to lower production. That raises costs massively, and then they will have to raise pricing to offset, making them even less competitive. It's a vicious trap you want to avoid.

A word about the number of styles and models to offer: adding a lot more models should only be done to larger plants. At some plants, the setup costs are too high to be offset by additional sales. You should never offer fewer than 100 or more than 350 models. Start with fewer (100 or so) and gradually add more as your market share supports.

Financing

The risk of this strategy lies in being highly leveraged at first. Keep in mind that your credit rating and image points only matter for the last few rounds, so use the early rounds as "loss leaders" here as you build the machine out.

You will need to borrow heavily to expand and upgrade your plants, especially for the LA plant. Because you will need to borrow, it is ESSENTIAL that you do not run out of cash and incur the penalty of an "emergency" loan. That will take away your ability to refinance (which is critical.)

The leverage can be managed if you are making smart risk assessments, cutting costs elsewhere, and monitoring your coverage metrics. A critical tool on the financial side: refinanceevery round. That means you pay off as much debt as you can by borrowing a new 10-year loan. Borrowing for 10 years will lower the principal payment, which improves the coverage ratio that contributes directly to credit rating.

You must repurchase as many shares as possible each round. This will soften the blow to your RoE as you lever up in the first few rounds, and it will pay off handsomely in later rounds. There are limits to how many shares can be repurchased in a round, and if you put it off thinking you can take a massive pile of cash and do a big repurchase later in the game, you'll be stuck. Also, since you are likely to have poor EPS and shareprice in the first two rounds, your costs of repurchasing will be less up front. If beneficial later, you can re-issue stock at a (hopefully) higher share price.

Remember, equity and debt are your capital structure. More debt means less equity and high RoE (a key scoring measure). Borrowing money for share repurchase is a good idea because your cost of equity is almost surely higher than your cost of debt.

Production

Achieving a given SQ rating at the lowest cost is the name of the game. Look at your company's performance reports. If the cost of low quality is $2 per pair, but you are spending $5 on TQM efforts, you need to ask yourself why you are doing that. Spending $5 to solve a $2 problem makes no sense. However, you want to continuously be investing in SOME improvement effort, because the cost of quality may rise rapidly if you aren't spending at least a little on TQM/Six Sigma. Let the effect on SQ rating drive your overall TQM spend, don't worry about "investing for the future" as it is likely you will never recover $5 per pair (or whatever the maximum investment is).

Do note the cost of waste and workmanship on your Plant Operating Report, page 1. It will tell you at the bottom the cost (per pair) of your rejected pairs. In one year, one of your plants had a cost per pair of maybe $0.40. The cost per pair on "cumulative best practices" however, was $1.79. THIS IS WASTEFUL! Never spend $1.79 to solve a $0.40 problem.

The best way to lower the cost per pair of poor quality is to limit the number of models offered. Defect rates can go from being 2.3% at 100 models to over 8.5% at 500 models. The higher the SQ of the shoes you are making, the more expensive a defect is, because you are throwing away far more expensive materials. As you go higher in SQ, you may want to shy away from offering a huge number of models (350 or 500). Consider this excerpt from the guide:

Production run set-up costs per plant for branded footwear are $1 million for 50 models, $2.5 million for 100 models, $4million for 150 models, $6.0 million for 200 models, $8 million for 250 models, $10.5 million for 350models, and $14 million for 500 models. The size of the plant does not matter in determiningproduction run set-up costs, only the number of models produced at the plant.

Especially at very small plants, the setup costs for lots of models can be killer. Do not fall into this trap! Pushing out lots of models drives lots of cost and higher reject rates. If you have larger plants, you can offer more models, but only on large plants. Let's say you have a large-ish, 4 million capacity plant-- setting it up for 250 models will put $2 PER SHOE of cost into the product. But setting it up for 500 models will put $3.50 of cost per shoe into the product. But if your mega-plant is 12M capacity? Now the cost of even 350 models is less than $1/pr. Having more models is a competitive advantage, but NOT as effective as having a lower price for the same or higher quality. Until your plant capacity is large, the cost per pair of more models is not as effective as just cutting the price by the same amount.

The upshot is that if you setup a plant for lots of models, you end up driving cost doubly: higher defect rates AND higher setup costs. Can your marketing and sales recover from $4 or $5 per pair disadvantage? Probably not. Only a truly huge capacity plant can produce 350 or 500 models cost-effectively, and even then only if the SQ isn't very high. It is exceedingly difficult to be cost competitive if you are producing lots of models at high SQ.

Beware of material cost variation. If the industry-wide demand for superior materials falls below 17% or so, then superior materials will actually cost LESS than the cheap materials. (it's true, read the BSG guide). Be sure that you always use at least 20% superior materials so that you are driving demand above this "inversion" point. Be aware of what your market rivals are doing. If they are all pursuing a dirt-cheap, Wal-Mart grade shoe at the lowest possible price, then you can make it backfire by going a couple SQ point higher-- your material cost will be less (or very close), but your SQ will be superior.

As your plant capacity grows, and your market share, you will be able eventually to produce a shoe of higher quality at a lower price. That is the ultimate competitive advantage.

Distribution

Distribution is often overlooked, but is a potential area where your team can gain an edge. The optimization of which plants supply which regions is pretty straightforward, and drives the decision to build LA and AP plants to optimize tariff avoidance and labor costs. The almost universal advice to avoid building a plant in Europe is not coincidence.

However, the core distribution effort is managing inventory levels. You absolutely want to avoid a stock-out situation (this occurred with my team several times, and was indication of poor pricing, as our prices were too low). Stock out is forfeited revenue, so if you are playing the game well, you should have a small amount of inventory left over without a stock out (Price is Right rules apply-- get as close as you can get without going too far). Stocking out is not a good thing, it shows you are being too aggressive. Your shoe shortage will drive sellers to your rivals because you couldn't deliver.

What if you have a round where you end up with a substantial amount of unsold shoes? What to do?

Sometimes you can clearance a fraction of the shoes at positive margin. If you can clear some out at a net gain, you should consider this. The cost of the inventory isn't just the loss of SQ, it is the pressure to produce lower volume at your plants (and drive up production costs). Compare your clearance gain/loss to the effect on production costs. It's likely that even small positive on clearance is a net gain.

It is almost always a bad idea to eat a significant loss and do 100% clearance. Better to slowly reduce inventory levels over a couple rounds be selling more than that round's production.

While the previous year's inventory is dropping an SQ point every year, the overall SQ assigned for all shoes in a given warehouse is the weighted average. At some level, the quantity of new production is a large enough proportion to make all that warehouse be considered that SQ. So carrying some inventory left over-- even two years or more-- is manageable if you have enough new production coming in and you take pricing action to increase sales.

Take the longer view on inventories-- do not try to solve an inventory problem in a single round. DO NOT do a 100% clearance and eat several dollars loss per pair. Clearance often turns possible future gains into certain present losses.

Game Scoring

Your business results after the first few rounds should assure that you will have EPS, ROE, and Share Price scores that will rank very well. Your credit score in the first few rounds will not be good-- remember, you are leveraging to build a massive weapon of war. It costs money, so you are borrowing heavily. Think of them as War Bonds. However, it is critical that you bring up your credit rating within the first four rounds, do not go more than 3 rounds with a dismal credit score.

The game scoring is cumulative across all rounds. That means you cannot dig yourself a hole so deep you cannot climb out of it. You must initiate recovery by round four(of a 10 round game) or three (of a shorter game). It's OK if you don't win every round at first. In fact, if you "win" the first few rounds, you are almost certain to lose the whole game.

If you far exceed some particular measures, you can achieve a 110/100, which offsets those early rounds where you didn't have good image or credit scores.

Conclusion

As the BSG likes to say, there's no one way to win the BSG. I have outlined above a strategy that worked and often can work well. But ultimately, a winning strategy is highly context-dependent. The best teams will recognize when what they are doing isn't working and recover in time. Others will fail to take timely action and be doomed as they end up in an unrecoverable situation.

For example, let's say that you are pursuing the high-volume strategy employed above, but so are several competitors doing it as well. In this "race to the bottom" someone is going to be the team that goes too far into debt, builds too much capacity, or (most likely) makes a critical pricing error that leaves them with a mountain of unsold inventory, and then they move too aggressively to clear that inventory. The Rule of the Herd is critical to remember: you don't have to be the fastest zebra to outrun the lionesses; you just can't be the slowest.

What that means is that you may need to wait for a rival to make a critical mistake-- like that zebra that stumbles just once. That might be selling the NA plant too soon (and offering a capacity advantage at discount to a ready rival). It might be not building in LA. It might be wasting millions on celebrity endorsers. Or on pointless marketing efforts like environmentally friendly packaging or such. Most likely, it will be a miscalculation on price and SQ-- you simply cannot spend enough on advertising to make up for high price and poor quality.

Be as aggressive as you can while recognizing the limits and managing risk, and you are likely to experience BSG success.

09/08/2014

I'm finding a lot of fascinating reading on behavioral economics-- the idea that people aren't rational economic actors, but instead behave economically just as irrationally as they do in other areas of life.

Consider this example from the Library of Economics and Liberty:

An example of suboptimal behavior involving two important behavioral concepts, loss aversion and mental accounting, is a mid-1990s study of New York City taxicab drivers (Camerer et al. 1997). These drivers pay a fixed fee to rent their cabs for twelve hours and then keep all their revenues. They must decide how long to drive each day. The profit-maximizing strategy is to work longer hours on good days—rainy days or days with a big convention in town—and to quit early on bad days. Suppose, however, that cabbies set a target earnings level for each day and treat shortfalls relative to that target as a loss. Then they will end up quitting early on good days and working longer on bad days. The authors of the study found that this is precisely what they do.

When Boris entered the room, Prince Andrey was listening to an old general, wearing his decorations, who was reporting something to Prince Andrey, with an expression of soldierly servility on his purple face. “Alright. Please wait!” he said to the general, speaking in Russian with the French accent which he used when he spoke with contempt. The moment he noticed Boris he stopped listening to the general who trotted imploringly after him and begged to be heard, while Prince Andrey turned to Boris with a cheerful smile and a nod of the head. Boris now clearly understood—what he had already guessed—that side by side with the system of discipline and subordination which were laid down in the Army Regulations, there existed a different and more real system—the system which compelled a tightly laced general with a purple face to wait respectfully for his turn while a mere captain like Prince Andrey chatted with a mere second lieutenant like Boris. Boris decided at once that he would be guided not by the official system but by this other unwritten system.

When you invite a middle-aged moralist to address you, I suppose I must conclude, however unlikely the conclusion seems, that you have a taste for middle-aged moralising. I shall do my best to gratify it. I shall in fact, give you advice about the world in which you are going to live. I do not mean by this that I am going to talk on what are called current affairs. You probably know quite as much about them as I do. I am not going to tell you—except in a form so general that you will hardly recognise it—what part you ought to play in post-war reconstruction.

It is not, in fact, very likely that any of you will be able, in the next ten years, to make any direct contribution to the peace or prosperity of Europe. You will be busy finding jobs, getting married, acquiring facts. I am going to do something more old-fashioned than you perhaps expected. I am going to give advice. I am going to issue warnings. Advice and warnings about things which are so perennial that no one calls them “current affairs.”

And of course everyone knows what a middle-aged moralist of my type warns his juniors against. He warns them against the World, the Flesh, and the Devil. But one of this trio will be enough to deal with today. The Devil, I shall leave strictly alone. The association between him and me in the public mind has already gone quite as deep as I wish: in some quarters it has already reached the level of confusion, if not of identification. I begin to realise the truth of the old proverb that he who sups with that formidable host needs a long spoon. As for the Flesh, you must be very abnormal young people if you do not know quite as much about it as I do. But on the World I think I have something to say.

In the passage I have just read from Tolstoy, the young second lieutenant Boris Dubretskoi discovers that there exist in the army two different systems or hierarchies. The one is printed in some little red book and anyone can easily read it up. It also remains constant. A general is always superior to a colonel, and a colonel to a captain. The other is not printed anywhere. Nor is it even a formally organised secret society with officers and rules which you would be told after you had been admitted. You are never formally and explicitly admitted by anyone. You discover gradually, in almost indefinable ways, that it exists and that you are outside it; and then later, perhaps, that you are inside it.

There are what correspond to passwords, but they are too spontaneous and informal. A particular slang, the use of particular nicknames, an allusive manner of conversation, are the marks. But it is not so constant. It is not easy, even at a given moment, to say who is inside and who is outside. Some people are obviously in and some are obviously out, but there are always several on the borderline. And if you come back to the same Divisional Headquarters, or Brigade Headquarters, or the same regiment or even the same company, after six weeks’ absence, you may find this secondary hierarchy quite altered.

There are no formal admissions or expulsions. People think they are in it after they have in fact been pushed out of it, or before they have been allowed in: this provides great amusement for those who are really inside. It has no fixed name. The only certain rule is that the insiders and outsiders call it by different names. From inside it may be designated, in simple cases, by mere enumeration: it may be called “You and Tony and me.” When it is very secure and comparatively stable in membership it calls itself “we.” When it has to be expanded to meet a particular emergency it calls itself “all the sensible people at this place.” From outside, if you have dispaired of getting into it, you call it “That gang” or “they” or “So-and-so and his set” or “The Caucus” or “The Inner Ring.” If you are a candidate for admission you probably don’t call it anything. To discuss it with the other outsiders would make you feel outside yourself. And to mention talking to the man who is inside, and who may help you if this present conversation goes well, would be madness.

Badly as I may have described it, I hope you will all have recognised the thing I am describing. Not, of course, that you have been in the Russian Army, or perhaps in any army. But you have met the phenomenon of an Inner Ring. You discovered one in your house at school before the end of the first term. And when you had climbed up to somewhere near it by the end of your second year, perhaps you discovered that within the ring there was a Ring yet more inner, which in its turn was the fringe of the great school Ring to which the house Rings were only satellites. It is even possible that the school ring was almost in touch with a Masters’ Ring. You were beginning, in fact, to pierce through the skins of an onion. And here, too, at your University—shall I be wrong in assuming that at this very moment, invisible to me, there are several rings—independent systems or concentric rings—present in this room? And I can assure you that in whatever hospital, inn of court, diocese, school, business, or college you arrive after going down, you will find the Rings—what Tolstoy calls the second or unwritten systems.

All this is rather obvious. I wonder whether you will say the same of my next step, which is this. I believe that in all men’s lives at certain periods, and in many men’s lives at all periods between infancy and extreme old age, one of the most dominant elements is the desire to be inside the local Ring and the terror of being left outside. This desire, in one of its forms, has indeed had ample justice done to it in literature. I mean, in the form of snobbery. Victorian fiction is full of characters who are hag-ridden by the desire to get inside that particular Ring which is, or was, called Society. But it must be clearly understood that “Society,” in that sense of the word, is merely one of a hundred Rings, and snobbery therefore only one form of the longing to be inside.

People who believe themselves to be free, and indeed are free, from snobbery, and who read satires on snobbery with tranquil superiority, may be devoured by the desire in another form. It may be the very intensity of their desire to enter some quite different Ring which renders them immune from all the allurements of high life. An invitation from a duchess would be very cold comfort to a man smarting under the sense of exclusion from some artistic or communistic côterie. Poor man—it is not large, lighted rooms, or champagne, or even scandals about peers and Cabinet Ministers that he wants: it is the sacred little attic or studio, the heads bent together, the fog of tobacco smoke, and the delicious knowledge that we—we four or five all huddled beside this stove—are the people who know.

Often the desire conceals itself so well that we hardly recognize the pleasures of fruition. Men tell not only their wives but themselves that it is a hardship to stay late at the office or the school on some bit of important extra work which they have been let in for because they and So-and-so and the two others are the only people left in the place who really know how things are run. But it is not quite true. It is a terrible bore, of course, when old Fatty Smithson draws you aside and whispers, “Look here, we’ve got to get you in on this examination somehow” or “Charles and I saw at once that you’ve got to be on this committee.” A terrible bore… ah, but how much more terrible if you were left out! It is tiring and unhealthy to lose your Saturday afternoons: but to have them free because you don’t matter, that is much worse.

Freud would say, no doubt, that the whole thing is a subterfuge of the sexual impulse. I wonder whether the shoe is not sometimes on the other foot. I wonder whether, in ages of promiscuity, many a virginity has not been lost less in obedience to Venus than in obedience to the lure of the caucus. For of course, when promiscuity is the fashion, the chaste are outsiders. They are ignorant of something that other people know. They are uninitiated. And as for lighter matters, the number of people who first smoked or first got drunk for a similar reason is probably very large.

I must now make a distinction. I am not going to say that the existence of Inner Rings is an Evil. It is certainly unavoidable. There must be confidential discussions: and it is not only a bad thing, it is (in itself) a good thing, that personal friendship should grow up between those who work together. And it is perhaps impossible that the official hierarchy of any organisation should coincide with its actual workings. If the wisest and most energetic people held the highest spots, it might coincide; since they often do not, there must be people in high positions who are really deadweights and people in lower positions who are more important than their rank and seniority would lead you to suppose. It is necessary: and perhaps it is not a necessary evil. But the desire which draws us into Inner Rings is another matter. A thing may be morally neutral and yet the desire for that thing may be dangerous. As Byron has said:

Sweet is a legacy, and passing sweet

The unexpected death of some old lady.

The painless death of a pious relative at an advanced age is not an evil. But an earnest desire for her death on the part of her heirs is not reckoned a proper feeling, and the law frowns on even the gentlest attempts to expedite her departure. Let Inner Rings be unavoidable and even an innocent feature of life, though certainly not a beautiful one: but what of our longing to enter them, our anguish when we are excluded, and the kind of pleasure we feel when we get in?

I have no right to make assumptions about the degree to which any of you may already be compromised. I must not assume that you have ever first neglected, and finally shaken off, friends whom you really loved and who might have lasted you a lifetime, in order to court the friendship of those who appeared to you more important, more esoteric. I must not ask whether you have derived actual pleasure from the loneliness and humiliation of the outsiders after you, yourself were in: whether you have talked to fellow members of the Ring in the presence of outsiders simply in order that the outsiders might envy; whether the means whereby, in your days of probation, you propitiated the Inner Ring, were always wholly admirable.

I will ask only one question—and it is, of course, a rhetorical question which expects no answer. IN the whole of your life as you now remember it, has the desire to be on the right side of that invisible line ever prompted you to any act or word on which, in the cold small hours of a wakeful night, you can look back with satisfaction? If so, your case is more fortunate than most.

My main purpose in this address is simply to convince you that this desire is one of the great permanent mainsprings of human action. It is one of the factors which go to make up the world as we know it—this whole pell-mell of struggle, competition, confusion, graft, disappointment and advertisement, and if it is one of the permanent mainsprings then you may be quite sure of this. Unless you take measures to prevent it, this desire is going to be one of the chief motives of your life, from the first day on which you enter your profession until the day when you are too old to care. That will be the natural thing—the life that will come to you of its own accord. Any other kind of life, if you lead it, will be the result of conscious and continuous effort. If you do nothing about it, if you drift with the stream, you will in fact be an “inner ringer.” I don’t say you’ll be a successful one; that’s as may be. But whether by pining and moping outside Rings that you can never enter, or by passing triumphantly further and further in—one way or the other you will be that kind of man.

I have already made it fairly clear that I think it better for you not to be that kind of man. But you may have an open mind on the question. I will therefore suggest two reasons for thinking as I do.

It would be polite and charitable, and in view of your age reasonable too, to suppose that none of you is yet a scoundrel. On the other hand, by the mere law of averages (I am saying nothing against free will) it is almost certain that at least two or three of you before you die will have become something very like scoundrels. There must be in this room the makings of at least that number of unscrupulous, treacherous, ruthless egotists. The choice is still before you: and I hope you will not take my hard words about your possible future characters as a token of disrespect to your present characters.

And the prophecy I make is this. To nine out of ten of you the choice which could lead to scoundrelism will come, when it does come, in no very dramatic colours. Obviously bad men, obviously threatening or bribing, will almost certainly not appear. Over a drink, or a cup of coffee, disguised as triviality and sandwiched between two jokes, from the lips of a man, or woman, whom you have recently been getting to know rather better and whom you hope to know better still—just at the moment when you are most anxious not to appear crude, or naïf or a prig—the hint will come. It will be the hint of something which the public, the ignorant, romantic public, would never understand: something which even the outsiders in your own profession are apt to make a fuss about: but something, says your new friend, which “we”—and at the word “we” you try not to blush for mere pleasure—something “we always do.”

And you will be drawn in, if you are drawn in, not by desire for gain or ease, but simply because at that moment, when the cup was so near your lips, you cannot bear to be thrust back again into the cold outer world. It would be so terrible to see the other man’s face—that genial, confidential, delightfully sophisticated face—turn suddenly cold and contemptuous, to know that you had been tried for the Inner Ring and rejected. And then, if you are drawn in, next week it will be something a little further from the rules, and next year something further still, but all in the jolliest, friendliest spirit. It may end in a crash, a scandal, and penal servitude; it may end in millions, a peerage and giving the prizes at your old school. But you will be a scoundrel.

That is my first reason. Of all the passions, the passion for the Inner Ring is most skillful in making a man who is not yet a very bad man do very bad things.

My second reason is this. The torture allotted to the Danaids in the classical underworld, that of attempting to fill sieves with water, is the symbol not of one vice, but of all vices. It is the very mark of a perverse desire that it seeks what is not to be had. The desire to be inside the invisible line illustrates this rule. As long as you are governed by that desire you will never get what you want. You are trying to peel an onion: if you succeed there will be nothing left. Until you conquer the fear of being an outsider, an outsider you will remain.

This is surely very clear when you come to think of it. If you want to be made free of a certain circle for some wholesome reason—if, say, you want to join a musical society because you really like music—then there is a possibility of satisfaction. You may find yourself playing in a quartet and you may enjoy it. But if all you want is to be in the know, your pleasure will be short lived. The circle cannot have from within the charm it had from outside. By the very act of admitting you it has lost its magic.

Once the first novelty is worn off, the members of this circle will be no more interesting than your old friends. Why should they be? You were not looking for virtue or kindness or loyalty or humour or learning or wit or any of the things that can really be enjoyed. You merely wanted to be “in.” And that is a pleasure that cannot last. As soon as your new associates have been staled to you by custom, you will be looking for another Ring. The rainbow’s end will still be ahead of you. The old ring will now be only the drab background for your endeavor to enter the new one.

And you will always find them hard to enter, for a reason you very well know. You yourself, once you are in, want to make it hard for the next entrant, just as those who are already in made it hard for you. Naturally. In any wholesome group of people which holds together for a good purpose, the exclusions are in a sense accidental. Three or four people who are together for the sake of some piece of work exclude others because there is work only for so many or because the others can’t in fact do it. Your little musical group limits its numbers because the rooms they meet in are only so big. But your genuine Inner Ring exists for exclusion. There’d be no fun if there were no outsiders. The invisible line would have no meaning unless most people were on the wrong side of it. Exclusion is no accident; it is the essence.

The quest of the Inner Ring will break your hearts unless you break it. But if you break it, a surprising result will follow. If in your working hours you make the work your end, you will presently find yourself all unawares inside the only circle in your profession that really matters. You will be one of the sound craftsmen, and other sound craftsmen will know it. This group of craftsmen will by no means coincide with the Inner Ring or the Important People or the People in the Know. It will not shape that professional policy or work up that professional influence which fights for the profession as a whole against the public: nor will it lead to those periodic scandals and crises which the Inner Ring produces. But it will do those things which that profession exists to do and will in the long run be responsible for all the respect which that profession in fact enjoys and which the speeches and advertisements cannot maintain.

And if in your spare time you consort simply with the people you like, you will again find that you have come unawares to a real inside: that you are indeed snug and safe at the centre of something which, seen from without, would look exactly like an Inner Ring. But the difference is that the secrecy is accidental, and its exclusiveness a by-product, and no one was led thither by the lure of the esoteric: for it is only four or five people who like one another meeting to do things that they like. This is friendship. Aristotle placed it among the virtues. It causes perhaps half of all the happiness in the world, and no Inner Ring can ever have it.

We are told in Scripture that those who ask get. That is true, in senses I can’t now explore. But in another sense there is much truth in the schoolboy’s principle “them as asks shan’t have.” To a young person, just entering on adult life, the world seems full of “insides,” full of delightful intimacies and confidentialities, and he desires to enter them. But if he follows that desire he will reach no “inside” that is worth reaching. The true road lies in quite another direction. It is like the house in Alice Through the Looking Glass.

04/11/2014

Business owners who have Facebook pages have been complaining to the company that Facebook users who have "liked' their pages are no longer seeing updates to the page.

In advertiser-speak, this 'organic reach' is declining-- as few as 3% of the people that "like" a page will actually see its status updates.

Facebook argues that without filtering, a typical user would get 1500 status updates a day. No one wants that many status updates. So FB argtues it has to filter stuff for the user's benefit.

I have a different idea, though. What if insead Facebook made it easy for people to unlike or do their own filtering? If a page is sending you too many updates, mute it or unlike.

It won't take long for people to figure out that those who "like" everything end up with cluttered feeds, and they will make the decisions about what they like enough to actually have pushed to their news feed.

People making their own choices and having consequences from that-- what a concept.

02/05/2014

If you are a DIY kind of guy like me, you probably own a reasonable collection of power and hand tools. Some are great, some not so great. You probably have tools you regret cheaping out on and some you probably overspent on. I have.

Whether you already have a good amount of tools (and will end up buying more eventually), or own very few and are looking to expand, here are some points to consider. This is the good judgment that comes from "experience"-- which of course comes from bad judgment.

Disclaimer: this may not apply if you use your tools professionally, where time is money.

So without further delay, here's a list of general principles for tool acquisitions:

Never sacrifice safety for low cost. That said, not all "safety" features really add much safety at all. Some are marketing gimmicks or just annoying.

Pay no attention to where it is made. Junk can come from the US, and quality stuff can come from China. What matters is design, material, and workmanship.

Simple things like air compressors, grinders, buffers, etc should be the cheapest you can find.

A spray gun should be the best you can afford (hint: it won't be sold at any big box store)

Apart from dust collection and vibration, a sander is a sander is a sander

Welders should be purchased from a specialty shop-- the mass market welders are most only newer designs because they tried to cheapen them as much as possible. A Lincoln welder from Lowe's is NOT the same grade as the one welding supply shop sells.

Here's an example of where I went cheap; I have an air compressor that is "oilfree" and whose motor directly drives the actual compressing cylinder. It is loud and obnoxious. It will probably only last about 500 hours or so before it burns out. But it costs half of what a nice oil-lubed, belt-drive compressor would cost, and my infrequent usage will take decades to hit 500 hours of compressor usage. I can replace the compressor and start the clock all over again and STILL not have spent more money than buying the nicer compressor the first time.

On the other hand, I learned the hard way to buy the nicest wire cutters you can find. Cheap ones will be made of softer steel and have blades that don't align properly. The soft still gets nicked and even if the edges align properly, you'll end up with a gap that prevents clean cutting.

Generally speaking, buying something middle of the road will cause you to end up skimping when you should have splurged, or overpaying for a high-end piece when a cheap junker would have worked just fine.

02/03/2014

Listening to Dave Ramsey on the radio, I heard a woman call in and ask how she might divide up an inheritance among the college funds for her three kids. Dave gave her a good, principled answer, but there is a way that you can go beyond principles and actually calculate what share of the money each kid will need.

Let's say that you inherit $100,000 and you have three kids-- one aged 16, another 14, and another 11. How can you divide up the $100k so that when each of the kids is 18 that they would have about the same amount of money saved for college?

For purposes of illustration, we'll assume that each of the kids' college savings is invested in the same thing and will earn the same rate of return over time. Though if you follow the example below, you'll be able to account for different rates of return for each kid's account.

What we have here is a basic time value of money problem, albeit with some complexity in that there are three interrelated problems.

The first thing we want to do is think in terms of factors, or percentages. That way, it doesn't matter exactly what the lump sump turns out to be, we will now how to divide it proportionally to get what we want.

Then we need to introduce the element of time. We need to figure out how much INequality we need to do to account for the different amounts of time. How do we allocate a total based on the different times available for the kids' college funds to grow? How much do we discount the pre-growth values so the values end up being the same?

We can use a basic time value equation to solve for the discounted factor for each. Let's take the 16 years old as an example. His savings will only have two years to grow. If we assume 8% per year (a reasonable assumption over the long term, less so in the short term), we can solve. N is the number of periods (years before they go to college):

FV=PV(1+r)^n

FV=PV (1.08^2)

FV=PV* 1.1664

PV= FV * 0.8573, or 85.7%

The 16 year old kid needs about 85.7% of what his 18 year-old self will need to go to college. That makes sense.

We repeat for the 14 year old Kid:

FV=PV(1.08^4)

FV=PV(1.36)

PV=FV(0.735).

The 14 year old will need to have 73.5% of what is 18 year-old self will need to go to college.

Finally, the 11-year old:

FV=PV(1.08^7)

FV=PV(1.7138)

PV=FV(0.5835)

The 11-year old kid needs to have 58.35% of his total college expenses in savings to he'll have 100% at age 18.

So we now know the relative weightings for the three kids: 85.7%, 73.5%, and 58.35%

How do we translate that into a proportion for allocation of a lump sum?

To weight them, we can first just add them all together in decimal versions to get a total of 2.18. Then we take each kid's factor divided by the total to normalize it

16YO: 0.857/2.18= 0.391, or 39.1%

14YO: 0.735/2.18= 0.337 or 33.7%

11 YO: 0.5835/2.18= 0.268 or 26.8%

To make sure each kid has roughly 33% of all the windfall, we need to allocate the percentages as above.

Let's check out work to see if this makes sense for a windfall of $100k.

The allocation says we should allocate to the 11 year old $26,800 in a college fund. Left to grow at 8% for 7 years, this amount becomes $45,931 at age 18.

What do we get if we allocate $33,700 to the 14 year old and let it grow for four years? $45,848

The 16 year old will have $45,606 saved for college in two years.

Now there's some rounding error (magnified by repeated rounding) that produces a couple hundred dollars variance between the three kids, but this should suffice to illustrate how you can account for the different ages of children in allocating a windfall towards college savings.

03/04/2013

Looking to the past can sometimes be worthwhile, for recollection, reminder, or just the emotions of a a trip down memory lane. I happened upon an excellent web page documenting how CBS lied about George W. Bush's service in the Texas Air National Guard to make it appear he wanted to dodge service in Viet Nam.

The clearly fraudulent documents that CBS relied upon resulted in a scandal that came to be known as "Rathergate" because Dan Rather was one of the main responsible parties. So obvious was the fraudulent nature of the documents that the real scandal became CBS' complete lack of due diligence while harboring a remarkable credulity for an unproven source.

Anyway, THIS SITE will demonstrate that the fraudulent documents were criminally amatuerish and CBS reliance upon them is similarly negligent.